First cross-border trades between Lagos and Accra

The implications of the successful first cross border share Transaction between Lagos and Accra

The economic integration of the West African sub-region is a long standing initiative that is at the core of the Treaty setting up the Economic Community of West African States (ECOWAS) four decades ago. The lofty objective of fostering a “common market” goes beyond eliminating trade barriers and fostering common trade policy. It also extends to the removal of obstacles to the free movement of capital among countries in the sub-region. While physical trade liberalization has been achieved to a considerable extent (a case in point is the recent adoption of the ECOWAS Common External Tariff), financial sector integration is a dream that is gradually coming to life. A number of factors are responsible for this rather slow growth in market integration in the region. One, the tepid growth of the individual countries’ capital markets which also closely tied to the stage of development of the financial market; two, the prevalence of tight controls on capital market transactions within the region and third, the lack of harmonization of capital market infrastructure including regulation, taxation, cross listing of securities and trading systems.

United Capital Plc and CAL stockbrokers recently took a bold step that kick-started the process of capital market integration in the sub-region within the framework established by the West African Capital Markets Integration Council (WACMIC). The WACMIC was set up in 2013 to harmonize the regulatory environment for the issuance and trading of financial securities across the region, as well as to develop a common platform for cross-border listing and trading of such securities. WACMIC comprises the Chief Executives of the region’s securities commissions and securities exchanges, and is tasked with designing the policy framework and managing the implementation of the process that will facilitate the creation of an integrated capital market in West Africa.

Blazing the trail, United Capital Securities, Nigeria and CAL Stockbrokers, Ghana teamed up with WACMI to facilitate the first stage of a phased capital market integration process for the sub-region in July 2015. This first phase involved the recognizing and formalizing of the informal relationship (at the regulatory level) that currently exists between West African Countries (In this case between Nigeria and Ghana), such that brokers within the two countries can trade securities and settle across both markets seamlessly. With signed memoranda of understanding (MOU) (recognized by each regulator in the two jurisdictions) in place, Ghana and Nigerian dealing members (broker-dealers) were able to trade among themselves via Sponsored Access. The first trade which was completed on 15 July 2015 was facilitated by the Nigeria Stock Exchange (NSE), in conjunction with the Ghana Stock Exchange (GSE) with the actual trade conducted by United Capital Securities. This first trade has successfully developed the framework for subsequent trades in the market.

This landmark transaction is important and beneficial to West Africa and the African financial markets in many ways. Liberalizing capital transactions across any region is the first step for integrated capital markets. Over the years, African financial markets have been left vulnerable to volatility resulting from massive portfolio inflows from countries that share little economic similarities with the region, causing a significant bout of macroeconomic instability in the domestic financial markets. The Ghana-Nigeria deal is expected to be a precursor to greater capital flows within a sub-region that already operates a liberalized trade environment. Other West African stock exchanges such as Bourse Regionale des Valeurs Mobilieres SA are expected to initiate similar deals, which could be greatly enhance the liquidity of financial markets in the region. In the near future, brokers in the participating countries will be able to channel direct orders of their clients to different markets, with the investors themselves reaping from the benefits of portfolio diversification across geographies. An added benefit to all stakeholders is the fostering of international best practices among market operators and regulators in the region.

In spite of the prospects, there is a still a number of hurdles to scale. Cross broader trading in the sub-region comes with numerous challenges especially given the uneven stages of developments that we currently see among African capital markets. The harmonization of market infrastructure is tedious. Perhaps, this explains why WACMI decided to set up a three-phase process. Rules enabling cross border trading are not in place in many African capital markets. The Nigerian and Ghana bourses however boast of Electronic trading and Direct Market Access which assisted in facilitating this premier transaction. This cannot however be said of many Exchanges in Africa as they are still at the teething stages of development. For cross boarder trading to be effective, the individual capital markets must promote Sponsored Access which enables brokers that are not direct market operators of an Exchange to participate in the Exchange by granting them remote access to the Exchange’s trading facility via technology.

In the near term, market operators intending to participate in this laudable initiative would need to scale up their IT support for trading securities as transactions can only be done electronically while orders would require an order management system that is synchronized with the local Stock Exchange. There is need to provide information about investment opportunities across markets within the region as this will help boost inter-market dealings by investors and assist market operators increase their revenues. Stronger Settlement system is also important. Additionally, there is need for a more robust banking system across markets such that investors can make payments in local currencies where orders are originated irrespective of the market they are trading into as this will help increase the volume/value of trades. Finally, there is urgent need to pass the enabling laws that would allow electronic trading and direct market access to take place in the various exchanges within the region.

Wole Shonibare is the Managing Director, Investment Banking at United Capital Plc. He has over 25 years experience of arranging financing for development spanning Asia, Europe, Middle East and Africa. Prior to joining United Capital, he was Managing Director and Head of Infrastructure, Africa, Middle East and New Markets at Renaissance Capital. He has also worked with KPMG as a Director in London and Dubai.